Predictable dynamics in implied volatility surfaces from OTC currency options

Chalamandaris, Georgios and Tsekrekos, Andrianos (2010) Predictable dynamics in implied volatility surfaces from OTC currency options. Journal of Banking and Finance, 34 (6). pp. 1175-1188. ISSN 0378-4266

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Abstract

Recent empirical studies report predictable dynamics in the volatility surfaces that are implied by observed index option prices, such as those prescribed by general equilibrium models. Using an extensive data set from the over-the-counter options market, we document similar predictability in the factors that capture the daily variation of surfaces implied by options on 25 different foreign exchange rates. We proceed to demonstrate that simple vector autoregressive specifications for the factors can help produce accurate out-of-sample forecasts of the systematic component of the surface at short horizons. Profitable delta-hedged positions can be set up based on these forecasts; however, profits disappear when typical transaction costs are taken into account and when trading rules on wide segments of the surface are sought.

Item Type: Journal Article
Journal or Publication Title: Journal of Banking and Finance
Uncontrolled Keywords: /dk/atira/pure/subjectarea/asjc/2000/2002
Subjects:
Departments: Lancaster University Management School > Accounting & Finance
ID Code: 64608
Deposited By: ep_importer_pure
Deposited On: 20 May 2013 09:16
Refereed?: Yes
Published?: Published
Last Modified: 23 Jan 2020 01:59
URI: https://eprints.lancs.ac.uk/id/eprint/64608

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